aThe following is today’s Orange County Housing Report, from my local economist friend Steven Thomas.

Orange County Housing Report: Bumping Along a Ceiling, August 3, 2014

With the best time of the year to sell coming to a quick end, Orange County appreciation is coming to an end.

A Ceiling in Values: Sellers are learning the hard way that they can no longer arbitrarily set the price.

Buyers, sellers, REALTORS®, lenders, and everybody else involved within real estate know that there is a palpable difference in the 2014 real estate market. The number of homes fetching multiple offers is shrinking drastically. Homes are sitting on the market. The expected market time is on the rise. The active inventory has been growing all year and just surpassed the 8,000 home mark, just a few hundred short of a long term county average.

The lesson for 2014 is that sellers cannot price their homes on a whim, on what they would like to walk away with from the sale of their home. 2012 and 2013 were completely different. In those years, values were skyrocketing. When that occurred, sellers were able to price their homes above recent sales. They dealt with multiple offers and often sold for more than their list prices. That simply is not the case anymore; yet, sellers continue to adopt that strategy and overprice their homes.

What changed? Values reached a level where buyers were no longer comfortable paying much more than the most recent sale. They wanted to pay what is “fair,” also known as the Fair Market Value. This explains why month to month appreciation has stalled. Unfortunately, news outlets across the country mainly report on year over year statistics; whereas, month to month statistics tell the real story. Orange County’s headlines highlighted a 10% increase in the median sales price year over year in June. Drill down a little bit deeper, when you remove new home sales, residential detached houses are up 6.6% and condominiums are only up 4.2%. That’s the difference in a year. Most important, month to month appreciation is flat.

With flat appreciation, the Orange County housing market is bumping along a value ceiling. And, the Autumn Market is right around the corner. Cyclically, housing cools a bit after the kids go back to school. It will cool further during the Holiday Market, from Thanksgiving through the first few weeks of the New Year.

When the market bounces along a value ceiling, occasionally there is a sale in a neighborhood that neighbors get really excited about and are lured to jump into the housing fray. Typically, they price above that sale in hopes that they can get more. They also add an additional amount leaving “room for negotiating.” Remember, this is a market where buyers do not want to pay too much for a home. So, the home sits on the market. Eventually, after one or two reductions, they arrive at or near the sales price of the home that motivated them to sell in the first place. Surprisingly, they still are unable to sell and just sit on the market longer. It could be condition, location, or upgrades, but often it is that buyers do not want to match the price of that most recent sale. After viewing similar properties, potential buyers feel that another buyer simply overpaid. That can still happen today, but just because one buyer is willing to stretch the value, the vast majority are not. The bottom line: when a home sits on the market even though it is priced at or near a recent closed sale, the price is too high.

As we bounce along a ceiling, sellers should price their homes realistically right from the start, taking into consideration the most recent sales, all pending sales, their condition, location, and upgrades. DO NOT PRICE BASED UPON OTHER LISTINGS; instead, know your competition, but price according to pending and closed sales. There are neighborhoods where every single home on the market is overpriced. In that case, instead of the lowest priced home selling, everybody will sit on the market with absolutely no success.

Active Inventory: The active inventory increased by 3% in the past two weeks and pushed past the 8,000 home mark.

The active listing inventory added an additional 231 homes in the past two weeks and now totals 8,057. That’s the first time the inventory has been above 8,000 homes since January 2012, 2½ years ago. Thus far in 2014 the inventory has grown without pause, adding an additional 3,324, a 70% increase, and is poised to continue to increase through the end August. Keep in mind, in order for the active inventory to grow, more home need to be placed on the market than are coming off as pending sales.

Last year at this time there were 5,522 homes on the market, 2,535 fewer than today.

Demand: Demand increased by 2% in the past two weeks.

Demand, the number of new pending sales over the past month, increased by 48 now totals 2,549. After an initial small dip in demand in July, it will slightly rise in August. Last year at this time demand was at 2,707, 158 additional pending sales compared to today.

Distressed Breakdown: The distressed inventory increased by 5% in the past two weeks.

The distressed inventory, foreclosures and short sales combined, increased by 13 homes and now totals 294, its highest level since December of last year. The distressed inventory started the year at 271, so it really has not changed much. The long term trend is for it to remain at a very low level. Last month, they represented only 5% of all closed sales.

In the past two weeks, the number of active foreclosures increased by 2 homes and now totals 78. Only 1% of the active inventory is a foreclosure. The expected market time for foreclosures is 65 days. The short sale inventory increased by 11 homes in the past two weeks and now totals 216. The expected market time is 48 days and remains one of the hottest segments of the Orange County market. Short sales represent 3% of the total active inventory. ( End of Steven’s report.)